Things that are widely known don't always move markets in obvious ways. With the U.S. Treasury close to defaulting, Treasury bonds have gone up in price (see chart above). You would have made money over the past six months owning government debt.

It's counter-intuitive, but it's what happened.

Short-term news can get you in trouble, since you are going to be one of the last people to find out about it. Most successful traders ignore the news and focus on strategies that have shown some evidence of working.

Individual investors also tend to do worse than the market because they under-diversify and over-trade. Jumping in and trying to trade based on instinct generally doesn't work.

There are good strategies, but you're not likely to find them without doing the appropriate research. Start here.

This video describes more than just entrepreneurship. It's about calling in general. Being an entrepreneur is hard and usually doesn't pay as well as just working for someone else. The speaker is right: those who make it in the long run would do it for free. It's the way they give back to the world.

The call to serve applies to Christian missionaires, too. What makes missionaries differ from the rest of us?

1. Their sacrifices are more visible and less avoidable.
2. Most have to raise support.

These two items also describe entrepreneurs.

Life is getting easier for the entrepreneur because of Internet access and the capital markets. It's easier to start a side business today, and if you really need funding to go big, you can go to a venture capitalist who's pooled the money from dozens of sources and spread risk to lots of start-ups.

Liquid markets and online account management have already made it possible for some missionaries to self-fund. Perhaps Internet access and globalization will eventually make life easier for all missionaries. What do you think?

In grad school, I saw how effective it is to combine ideas from different places. One example is the problem of making peptides and DNA, both of which look like long chains. Is there a way to make a chain a thousand molecules long? The answer to this question sheds light on long-term missions.

Chemistry

Scientists figured out how to use the technology made for purifying (separating) molecules and instead use it to put molecules together. They took the plastic beads that impurities would normally stick to and used them backwards. They got the molecule chains they wanted to build to stick to the beads and made sure that impurities would rinse away from the beads easily. Repeating a simple build-and-rinse process a thousand times created a chain a thousand molecules long.

The familiar idea of tentmaking also comes from putting two different ideas together, allowing Christians to go overseas without having to raise financial support.

Tentmaking combines vocation + missions.

One of the potential problems with tentmaking is that you may make a high income and support a family in the U.S., but this ability could disappear once you leave the country. Our church sent a group to visit refugees earlier this week. We saw highly skilled people from other countries who had moved here for political reasons. They work in jobs they're under-qualified for because they don't speak English.

Self-Funding Missions

If you make a high income in the U.S. but can't do it outside the country, you can still self-fund a long-term mission trip. Like tentmaking, self-funding is a fusion of ideas from three seemingly unrelated places:

Self-funding combines personal finance + investing + missions.

The key is to earn more than you spend, invest the money wisely, and give your money time to grow. In this example scenario, a married couple could potentially spend the rest of their lives overseas after saving and investing for only seven years.

Why Doesn't Everyone Do It?

Sometimes I wonder if I'm saying something obvious. None of the components (personal finance, investing, missions) is new. However, the ideas in each field get discussed in small, closed circles without the chance for cross-fertilization. We're finally bringing different ideas together to make something new happen.

One man's trash is another man's treasure. By taking obvious, well-explored ideas from one field and applying them to a new field, we create wealth without working harder. We are doing with ideas what free trade and the division of labor do for the economy.

Check out Steven Johnson's perspective on where good ideas come from. The second video is from his TED talk and explains how something we use every day was invented by accident.

In its short existence, The Reformed Trader has drawn on everything I know: personal finance, investing, basic economics, cultural perspectives on time and productivity, and theology. This challenge has been a blessing for me, but I never suspected that God would open the door even wider.

Money appears to be the barrier that keeps us from our dreams, but it would be a deceptive oversimplification to stop there. Money is a test of your character (see Deuteronomy 8). You can see this in the lives of those who win the lottery. Those who have nothing greater to live for raise their standard of living, spend the money quickly, borrow even more, and end up with less than they started. Wealth is a great tool, but it makes a poor god.

Love and Respect

What does motivate people to live for something greater? Dr. Emerson Eggerichs, the author of Love and Respect, says that God communicates to us through a woman's need for love and a man's need for respect. These are powerful desires (Ephesians 5:22-33, 1 Peter 3:1-7), and when they aren't met, we cry out and hurt others in desperation.

When a wife doesn't feel loved, she reaches out to her husband to try to "fix" the problem. But because a man's fundamental need is respect, he views her efforts as disrespectful attempts to fix him, not the relationship. He responds by cutting off what he views as unhealthy communication. This rejection leaves her feeling even more unloved, which causes her to treat him with even more of what he views as disrespect. Eggerichs calls this the Crazy Cycle.

But just as miscommunication can cause the Crazy Cycle to escalate, a healthy application of love and respect can cause appreciation and goodwill to escalate. Eggerichs calls this the Energizing Cycle.

These insights alone have been incredibly convicting to me. I can see how I've treated the women in my life in unloving ways, and a repentance-fest is currently underway.

So what does Dr. Eggerichs' thesis have to do with reaching your dream?

Funding Your Dream

Funding a dream as big as permanent overseas missions or sending your kids to a Christian school requires a great deal of vision and discipline. I keep coming back to the idea of time perspective. If the future is important to both of you, you can work together to delay gratification, save money, and allow it to grow.

I'm not married, so I'm going to take a stab in the dark. Couples who are constantly living in unforgiveness are not going to have the reserves of patience necessary to spend ten or twenty years self-funding their dream.

But there's more than just being unified.

What Motivates Men?

If you're a pastor, you may have been thinking this whole time, "I can't even get the young men in my church to quit video games on Wednesday and help out with the kids. How are they supposed to dream and plan ahead with this kind of a work ethic?"

Although this is not universal, my suggestion is that a man generally gets a work ethic if he finds a woman he loves, someone who respects him. Because we're encouraging people to delay marriage until their thirties, men may not feel a need to grow up as quickly.

Look at what happened to Jacob once he met Rachel:

"Now Jacob loved Rachel, so he said, “I will serve you seven years for your younger daughter Rachel.” Laban said, “It is better that I give her to you than to give her to another man; stay with me.” So Jacob served seven years for Rachel and they seemed to him but a few days because of his love for her." (Genesis 29:18-20)

Jacob was willing to work for seven years as an indentured servant to marry the woman he loved. Most of us would have found this grueling, but to Jacob, it seemed like just a few days. I suspect it would be healthy to encourage men to stretch their wings and marry younger. There's something about love that can make service a joy.

But wait. There's more!

More than Love

Men are wired to need and understand respect. It's interesting to note that even men who are disobedient to God's Word can change, but Peter says it's with respect that wives win their husbands over. (1 Peter 3:1)

Even as someone who's not married, I can say from experience that respect matters. Every man, even an unmarried one, need to be someone's hero. This Web site exists because a few people stuck with me for years and never stopped encouraging me. I'll work until I'm too tired to stay awake because they think I can make a difference.

In Dr. Eggerichs' words, they believe in me more than I believe in myself. That is respect.

The Difference

Someone, somewhere is going to avoid the next crash of 2008 because he read this.

A college student will decide that she can have her dream of homeschooling and will begin saving money for it.

A young couple will decide to live on one income instead of two because of this. After seven years, that couple will move permanently overseas in service without any funding from their home church. That church will have more money for urgent local needs.

I'll never know their names, but the thought that a few articles can do something this big makes me want to work harder.

Imagine climbing Mt. Everest or catching alligators with your hands. This is bigger.

So far, we've discussed how you can self-fund ambitious dreams like lifetime overseas missions or sending your kids to a Christian school. But what about something smaller?

I have friends who regularly take summer trips overseas. Individual trips don't have to be expensive, especially if they're mission trips, but funding them over and over again, every summer, can still be challenging.

Starbucks

Starbucks has a well-deserved reputation for taking care of its employees. It's a great company to work for, but how can you get them to fund your summer trips without having to work there?

If you've been following this blog, the answer is familiar by now. Step 1 is to earn more and spend less.

The Coffee Cost Calculator shows you how much money you'll have if you make coffee at work instead of buying it one cup at a time each morning. Assuming that you drink one cup a day, 250 days per year, you currently spend $813 per year more on coffee than you otherwise would.

If you make coffee at work every day and invest the saved money at a 7% inflation-adjusted return, the calculator says you'll have $11,200 after ten years.

I'm not hating on Starbucks. You can buy a 20-oz. bag of brand-name Starbucks coffee for $13 and save a lot of money making it at work. A bag that big makes a lot of coffee. That worth eleven grand to you?

$11,200 isn't enough to live overseas for the rest of your life. It'll pay for Christian school tuition for a year and a half. But that's not what we're after in this particular case.

Enough for Each Summer

If you're going to a developing country each summer for a mission trip, one of the major expenses is your plane ticket. That may be the expense that's hardest to pay for.

I used Kayak.com to look up the cost of a round-trip plane ticket from Oklahoma City to San José, Costa Rica. Using flexible travel dates to save money, I found two airlines, United and Continental, that will do the round trip for around $600 to $650. None of the round trips I saw cost more than $710.

If you save $813 a year by making coffee at work, you've paid for the plane trip.

There you have it:The Starbucks Sponsorship Plan for Short-Term Missions.
If they decide to offer a real sponsorship plan for their employees, don't forget.

There are thee steps to self-funding your dream: (1) saving money, (2) investing wisely, and (3) time. Some of us don't think we can get past the first step because as our income goes up, so does our spending. We have to keep up with the Joneses. But what are the Joneses doing?

Chances are, the Joneses are paying for their new cars, cable TV, 4G phones, new furniture, and utility bills with debt. The average American household has $18,600 in consumer debt, a third of which is credit card debt. This number doesn't include home mortgages or home equity lines of credit.

Mrs. and Mrs. Jones may even have borrowed against their home to buy yet more goodies, since loans against homes aren't counted as consumer debt and don't always affect credit scores.

Even before the 2008 financial crisis, one in five Americans said they planned to borrow to pay their winter heating bills.

What could you buy with $18,600? Would this close the gap between you and your neighbors? The problem with comparing yourself to them is that they didn't have that money, either. They're still making payments on what they bought.

Crucifying the Dream

Let's look at what the Joneses are giving up by borrowing this money.

If they're paying 16% interest on their consumer debt and inflation is at 4%, their inflation-adjusted rate is 12%. Let's make the charitable, but unlikely, assumption that interest rates will stay at these low levels in the future. Let's also assume that they roll over this debt to new credit cards and aren't concerned with paying it off.

How long will it take before their debt expands to $200,000 after adjusting for inflation?

Recall that $200,000, throwing off $14,000 a year in passive income, is the amount of money a family needs to live overseas indefinitely. It would put two children through Christian school at $7,000 annual tuition per child.

By borrowing to finance their lifestyle, the Joneses have sold their future. In twenty years, they will owe an inflation-adjusted $200,000, an amount that could have bought them their life's dream.

We hope the toys were worth it.

Debt Is Slavery

You may be frustrated because you can't afford cable TV and an iPad. But chances are, the Joneses can't either. Borrowing gives us the appearance that they can.

Don't let new furniture and a shiny car steal your dream from you. You have a passion to serve God. Steward His money well.

The world will be a better place for your service, not just for you, but maybe for the Joneses, too.

1 A good name is to be more desired than great wealth,
Favor is better than silver and gold. 2 The rich and the poor have a common bond,
The LORD is the maker of them all. 3 The prudent sees the evil and hides himself,
But the naive go on, and are punished for it. 4 The reward of humility and the fear of the LORD
Are riches, honor and life. 5 Thorns and snares are in the way of the perverse;
He who guards himself will be far from them. 6 Train up a child in the way he should go,
Even when he is old he will not depart from it. 7 The rich rules over the poor,
And the borrower becomes the lender’s slave. Proverbs 22:1-7

Since drift in the random-walk theory has to be constant by definition, and since all stock movement other than drift is random, the most common form of the random-walk model can actually say, "On average, this stock is xx% likely to move this far once every yyy years."

Let's look at some examples of real market behavior.

Crude oil dropped 8.8% in one day on May 5, 2011. According to the traditional random-walk model, a one-day move this large only has a 0.08% chance of happening if we sit and watch crude oil for an entire century. (Reuters)

"The 20th century saw 48 days in which the Dow Jones Industrial Average swung more than 7 per cent. “Normal” statistical modelling predicts such swings should happen once every 300,000 years." (Financial Times)

"If the market followed a normal distribution, we would expect to see days greater or less than 5 standard deviations (or roughly +/- 4.7% by my calculations) about once every 6,922 years…we’ve seen FIVE so far this month [October 2008]." (MarketSci)

In other words, if the random-walk model is true, price movements the size of the 1987 crash should happen once every 300,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 years. That's a three with forty-seven zeroes after it.

The large, sudden price movements above are called fat tails. An economist who read this article pointed out that there are forms of the random-walk model that are consistent with fat tails. Fat tails can serve as evidence against the form of investment management called Modern Portfolio Theory without refuting more sophisticated random-walk models.

Most money managers use Modern Portfolio Theory and variance-at-risk models to manage money, which don't manage the risk of fat tails properly. They have good reasons for doing this: reasons that are mostly good for them, less so for you.

The random-walk model assumes that beating the market is impossible to do consistently over time. People who try to beat the market sometimes mistakenly trade so much that they pay more in commissions than they make in the market. If you assume you can't beat the market, you won't over-trade. Your manager is trying to help you think long-term.

But if you in fact can beat the market without over-trading, using the random-walk model is counterproductive.

Another reason: If the model says it's impossible to beat the market, your manager won't be blamed if he doesn't don't beat the market.

Modern Portfolio Theory has come to dominate business schools so much that graduates don't know how to manage money any other way. The math is easy, so the model is easy to teach and simple to apply. Even managers who think they can beat the market use it because it's what they know how to do.

The hedge fund Long-Term Capital Management used similar math to manage money. It worked for a few years, but the fund failed spectacularly in 1998. The failure was so big that the Federal Reserve had to organize a bailout.

Instead of learning from this, investment banks continued to use similar methods to manage mortgage-backed securities, leading to the crash of 2008.

Modern Portfolio Theory is more than just inaccurate. It led investors into the jaws of financial death.

For more information about fat tails and the problems with traditional financial models, read The Misbehavior of Markets by Benoit Mandelbrot.

When we first discussed how to fund your dream, we assumed a 7% return after adjusting for inflation. If you make 11% before inflation and your money loses 4% of its value per year, you're really making 7%.

"But doesn't an 11% return beat the market?" you ask. "I thought that was impossible."

To answer that question, let me tell you a story.

The Random-Walk Model

Picture yourself in a boat on a river. The boat slowly moves down the river, but small waves also strike it from every side. The movement down the river is called the boat's drift. The buffeting from the waves is called volatility.

This is the picture that most money managers use to model the stock market. In their minds, the market always drifts upward at the same speed, and the waves' movement is completely random. This is called the random-walk model.

In this model, the stock market is supposed to move like drunk man who's slowly making his way down the street. His steps are mostly random in the short term but have a constant drift in the long term.

Now imagine a race with hundreds of boats floating down a very wide river. If the water drifts at a constant speed and the waves are completely random, the best thing you can do is bet on every single boat.

That's why your money manager tells you that beating the market is impossible over the long term. The hundreds of boats are the market. If stocks, like boats, simply drift in the long term and move randomly in the short term, picking winning stocks is a madman's dream.

Momentum

(Un)fortunately, this picture is not real for either the river or the stock market. If you've ever gone kayaking, you know that a river's speed isn't constant. There are places where the speed changes due to the shape of the banks and the river's width and depth. These changes in speed depend on the river's shape, and they're not random.

Fast water tends to follow fast water, and slow water tends to follow slow water. In stock market terms, this is called momentum. If you're trying to win a boat race, you want to be in the fast water. And if you're trying to win in the stock market, momentum matters.

Evidence of Momentum1

Here's some evidence for the existence of momentum. Non-geeks, click the links at your own peril. You have been warned.

"Long-term moving average crossovers [a momentum strategy] haven’t been useful for generating outsized returns, but they have done a good job protecting investors from protracted downturns." (MarketSci)

"Moving average crossovers have been more effective over the last decade than at any point in the last 80+ years." (MarketSci)

"With no data mining or systems optimization, such that anyone analyzing the same S&P500 database would have made the same investment decisions, this basic trend-following system beats the markets." (AdvisorPerspectives)

"Applied to the S&P 500 index over 1900-2005, the model produces a 10.66% compound annual growth rate, compared to 9.75% for buy-and-hold. The timing model is less volatile than buy-and-hold. The model underperforms the index in about 40% of all years but avoids the worst bear markets.... Over the period 1972-2005, the timing model improves raw (risk-adjusted) returns for about 70% (90%) of 20 other indexes across asset classes." (CXO Advisory)

"A non-discretionary, trend-following model acts as a risk-reduction technique with no adverse impact on return. When tested on various markets, risk-adjusted returns were almost universally improved.... In addition, the investor would have also been able to sidestep many of the protracted bear markets in various asset classes. Avoiding these massive losses would have resulted in equity-like returns with bond-like volatility and drawdown." (Mebane Faber)

Besides having momentum, real rivers sometimes make sudden waves that are much larger than normal. These waves happen in the stock market too and are called fat tails.

Traditional money managers aren't prepared for this because their models assume that fat tails can't exist. If you're interested, you can read more about fat tails here.

How to Trade Momentum

The good news is that you don't have to be a genius to make money. You do have to think differently. If you let go of the assumption that beating the market is impossible, you can trade momentum.

Remember that momentum is the tendency of a market to keep moving once it's gotten started. A market that's moving up tends to keep gaining. One that's falling tends to drop further.

One way to use momentum is to sell out of markets that start falling to avoid further losses. Once the momentum has shifted back to an upward direction, we buy back in. The math involved in doing this only takes a few minutes a month.

I mentioned a book called The Ivy Portfolio when we discussed how to fund your dream. The book's strategy uses momentum to avoid large stock market losses. It also looks how the Harvard and Yale endowments diversify their investments. The combination of momentum and diversification leads to the market-beating returns you asked about in the beginning of this article.

In my own trading, I rely on more than just momentum. If you'd like to trade multiple strategies like I do, read the Resource page on this site to get started. Just know that it will take you years to learn more than one strategy. You have to make it a second job.

Out of all the strategies I know, momentum is the simplest to apply. This is good for someone who wants to be an investor, not a trader.

My guess is that you want to spend most of your time earning more, spending less, and preparing for your dream of ministry. So get to it!

[1] An economist who read this post commented that evidence of momentum (not evidence of fat tails) is the correct way to address weaknesses in the random-walk model. I've added this extra section to the post as a result. This post used to have a section about fat tails and money management. I modified the section to address the distinction between Modern Portfolio Theory and random-walk as a broader hypothesis and then moved it to its own post.

We've already discussed how you can reach your dream by (1) saving money, (2) investing wisely, and giving yourself (3) time. If you can fund your dream on $14,000 a year and save $500 a month, you could reach that goal in as little as 18 years.

What if you want to get there faster? If you're young and married, you may have an advantage.

Out of College

Take James and Jean, a typical working couple just out of college. They want to reach $200,000 in investments, which throws off $14,000 a year at a 7% inflation-adjusted return. If they live on James' salary and save Jean's, they'll reach their goal sooner.

To find out how long it will take, use this calculator. I assumed that after taxes and tithe, Jean will save $25,000 a year, or $2083 a month. With a 7% inflation-adjusted return (enter 0% in the "inflation" box), they can reach their goal in only seven years.

Big Dreams
Using the numbers above, a young couple with no debt eventually gets a $200,000 investment portfolio throwing off $14,000 of passive income ever year. They'll be in their early thirties by the time this happens. What does it buy?

It's enough for a family to live overseas in some countries. Since they're not drawing from their investment portfolio, but just living off of the return that it generates, they can stay abroad indefinitely if they manage their money wisely.

The Reformed Trader was conceived on July 9, 2011. The site became a reality eight days later. (If only all pregnacies could occur so smoothly and speedily!) Thank you to Ting, Keith, Norman, Kelly, Aldi, and the Lux family. By God's providence, you made this possible.